My name is on many “real-estate-for-suckers” spam
lists, and some it comes out of Britain from Mondinion, Global Investments Incorporated,
PropertyO, NuBricks or whatever name they change to again. This is a group of
British real estate salesmen internationally hawking rental properties in some
of America’s most troubled urban residential markets, such as Detroit and St.
Louis. The central problem with these cities is depopulation, and in 2017 CBS
News declared St. Louis to be the fastest depopulating major city in the
nation, with population declining by more than 1% per year.
One may wonder why they would go to such trouble to
find and market properties in bad neighborhoods of America’s fastest
depopulating major cities. It is because they can claim high initial rates of
return on investment (“capitalization rates”) without disclosing such recurring problems as
vacancy, low income areas, foreclosures, depopulation and crime in the neighborhood,
instead describing these neighborhoods as “stable” and “safe”. These properties
can be acquired quite cheaply and be flipped to naïve British pensioners and foreign
investors.
High capitalization
rates, such as return on investment > 10%, indicate properties with uncertain futures and
high risk; thus the investor wants to get his return on investment much sooner
before conditions deteriorate. There is also the possibility that the numbers are false.
I commented previously about
them in 2017 (https://www.internationalappraiser.com/2017/11/lately-i-have-been-receiving-e-mails.html) when they were selling residences in the Detroit
area, which they continue to do. They described the Inkster, Michigan
neighborhood as safe although it ranked 93 percentile for crime in the state of
Michigan.
This time Global Investments contacted me with a list of 6 homes in
St. Louis. I chose to analyze one at random, 5752 Astra Avenue, an 1107 square
foot, two bedroom, 1 1/2 bathroom home built in 1927 which they listed for $43,900
(about $45 per square foot) and described as “fantastic” and tenanted at a
rental rate of $750 per month.
Checking the local Multiple Listing Service I found
that the home was still vacant and listed for sale, but a sale was pending, maybe
to Global Investments, the company that is marketing these homes. The
brochure begins by describing the house as a 3-bedroom house (not 2 bedrooms as actual) and already
tenanted. The
brochure itself shows the house to be vacant, with the only furniture being a
dining table. They also neglected to disclose that the home is next to a
mosque.
These groups have the habit of marketing their properties as rented, but the photos they show are of empty properties. If they do have a tenant waiting, why would a tenant wait when there are other vacant homes ready to move into?
These groups have the habit of marketing their properties as rented, but the photos they show are of empty properties. If they do have a tenant waiting, why would a tenant wait when there are other vacant homes ready to move into?
From an appraiser’s point of view I searched for the 3
most proximate sales to the property this year and found two similar but larger
homes at 5980 and 5984 Astra which sold for $10,000 and $20,000, respectively.
The next closest sale was on a cross street, 5756 Vivian Avenue, a 2504 square
foot duplex that sold for $52,000. The prices ranged from $6.86 per square foot
to $20.52 per square foot.
As for the neighborhood, the Census Bureau’s information
for this census tract as of 2015 was that it had a median annual household
income of only $24,519 and a housing vacancy rate of 19.2%. This is about as
bad as urban neighborhoods get.
The property was represented as tenanted, although
vacant, so it is hard to say whether it would earn $750 per month, but more
importantly, neighborhoods like this have poor tenant quality, so the new owner
would have to scramble around to rent the home again before too long. When
there is depopulation, filling homes can sometimes be like a game of musical
chairs. This home is also adjacent to a mosque, which may be considered an adverse influence.
I was later telephoned by Global Investment’s sales
director, who also advised me that they also charge a fee of $4000 in addition
to the purchase price, to compensate their efforts in turning around the
property. Had they actually been to St. Louis?
I have seen other rental
home opportunities marketed by Global Investments Incorporated for cities such as Chicago, Cleveland
and Memphis. These are all depopulating cities. CBS News, for instance,
compiled a list in 2017 of the 12 major U.S. cities fastest losing population:
1. St. Louis
2. Baltimore
3. Milwaukee
4. Buffalo
5. Detroit
6. Cleveland
7. Hartford
8. Rochester
9. Chicago
10. Memphis
Here’s the reason to avoid
such investments: Depopulating cities experience decreasing property
values and rents. Investing in older buildings in depopulating areas is a
prescription for failure. The Rust Belt, for instance, has many cities that
have lost half their population in the last 50 years, including Detroit,
Cleveland, Youngstown and Dayton. This usually means increasing
vacancies, despite gallant leasing efforts. Rents are so low that only
the lowest cost renovations make any sense, too. Even then, other new space
gets built, hastening the demise of the older buildings.
So beware of rental properties being offered at high returns; these returns might not be long lasting.
Update Dec. 5, 2019:
A list published on AOL today indicated that the 6 fastest depopulating U.S. cities, in absolute numbers, are:
1. Chicago
2. Los Angeles
3. Detroit
4. St. Louis
5. Cleveland
6. Memphis
Update Dec. 5, 2019:
A list published on AOL today indicated that the 6 fastest depopulating U.S. cities, in absolute numbers, are:
1. Chicago
2. Los Angeles
3. Detroit
4. St. Louis
5. Cleveland
6. Memphis